Auto Insurance

What Is Liability Insurance?

If you’re in a vehicle accident and are at fault, the liability coverage included in your vehicle insurance policy can help cover the cost of injuries or damages caused to other parties. This guide explains the basics of liability insurance and what you need to know to ensure you’re properly covered. 

What is Liability Insurance

If you’re involved in a motor vehicle accident and someone else gets hurt, you could be held liable for their injuries. The same may be true for property damage, such as damage to their vehicle. In some cases, the damages could run up to hundreds of thousands of dollars or more. However, you do not necessarily have to pay for these costs out of pocket with liability insurance.

What is Liability Insurance?

Liability insurance is a part of many standard auto insurance policies and is not a separate type of insurance policy. It’s designed to cover the costs of the other party’s expenses if you’re at fault in a vehicular accident. As a driver, it’s important to understand what is (and isn’t) included in your liability coverage.

What Does Liability Insurance Cover?

Liability insurance protects you in the event that you, or someone driving your vehicle, are found liable in a vehicle-related accident. This means that it pays out to the other party, also known as the claimant, if they sustain monetary damages either by being injured or having their property damaged.

Liability insurance often includes bodily injury and property damage. Bodily injury coverage helps cover medical expenses and other costs sustained by the the claimant, such as time taken off work for recovery. Property damage coverage concerns damage to the claimant’s vehicles and property. For example, if you were to damage their home with your vehicle, your liability insurance would pay to fix their home.

Bodily Injury Liability

Your bodily injury liability insurance pays out if another party is injured in an accident for which you are at fault. It typically covers costs such as medical expenses, recovery treatments, and lost wages if the person isn’t able to work due to their injuries. If another party dies as a result of an accident you caused, your bodily injury liability policy may also cover a portion or all of their funeral costs. This coverage helps to protect you from being sued for the injured party’s expenses.

Property Damage Liability

Property damage liability covers damage caused to vehicles and other property as a result of an at-fault accident. This may include damages to the other driver’s car, a fence you ran into, or a sign you knocked down.

In some cases, this insurance may also cover items inside the other person’s vehicle. For example, if you hit a van and a crystal chandelier it was carrying in the back was smashed, your property damage liability may cover the cost of the chandelier as well as any damage to the vehicle itself. If you’re sued after the accident, your liability coverage can also cover your attorney’s expenses and court fees.

What Doesn’t Liability Insurance Cover?

Liability insurance does not cover your own medical expenses or any damage done to your own vehicle. Instead, coverage for injuries to yourself are covered under the personal injury protection or medical payments portion of your policy. If your healthcare expenses exceed your coverage, you may need to turn to your health insurance policy for further health-related coverage.

Coverage for damages done to your property is provided through collision and/or comprehensive coverage within your auto insurance policy. Collision insurance covers damage to your vehicle if you hit an object or another vehicle, while comprehensive insurance covers non-crash damage, such as damage from a falling tree or hitting an animal.

In cases where the other driver is at fault, you may be able to file a claim with their insurance company to request reimbursement for your medical expenses and costs for damage repair. 

How Does Liability Coverage Work?

If there is a vehicle accident where injuries or damages are caused, the claimant would need to start the claims process by filling a claim with the at-fault driver’s insurance company. This usually begins right after the collision. For example, if you are involved in a collision, you and the other driver may pull over and exchange your respective driver’s license and vehicle insurance information. It is advisable to call your local police station so that you have an official police report on file as well to avoid confusion.

After this, you both may need to notify your car insurance companies of the incident. From there, the insurer will conduct an investigation to determine the details of the accident, including who was at fault. A representative from the insurance company may contact you and request a recorded statement. They may also contact the other party and review police and medical records.

In some cases, the other party’s insurance company may work with your insurance company directly to settle the claim. Sometimes, the other party’s insurance company may advise them to file a claim directly with your insurance provider if they think you are at fault for the collision. Once the investigation is complete and it has been determined that you are liable for the damage, the other party may receive compensation from your insurance company.

Liability Insurance Coverage Requirements

In most states, the liability insurance coverage is typically listed as a trio of separate numbers. For example, you may see coverage listed as 25/50/25. These numbers represent what your insurance company may pay out in the event you are liable in an accident.

  • The first number refers to the bodily injury liability limit per person in thousands
  • The second is the bodily injury limit per accident in thousands
  • The third is the total property damage coverage in thousands

These coverages are listed as the maximum the insurance company will pay per accident.

In the example listed above, the policy would cover a maximum of $25,000 per covered person injured, but no more than a total of $50,000 per accident. In addition, it would cover $25,000 in property damage.

No-fault Liability Insurance

In some states, known as no-fault states, there is no need to go through the effort of determining which party is at fault for an accident. In these states, each party files a claim under their own insurance policy, regardless of who caused the accident. In some cases, you also may not be able to sue the other driver unless your injury meets a certain threshold, as defined by the state.

No-fault states currently include:

  • Florida
  • Michigan
  • New Jersey
  • New York
  • Pennsylvania
  • Hawaii
  • Kentucky
  • Massachusetts
  • Minnesota
  • North Dakota
  • Utah

Many no-fault states require personal injury protection as part of your basic vehicle insurance coverage. PIP helps cover accident-related medical expenses suffered by you or your passengers. If a party in the accident suffers injuries that exceeds the state’s threshold and your policy limits, you may be sued for additional damages. In this case, your liability insurance may help protect your assets.

Who Needs Liability Car Insurance?

Almost every state in the country requires drivers to carry at least a minimal amount of liability car insurance. This is primarily to ensure that you’re able to provide financial relief to victims for any damage you may cause while driving. If you don’t carry liability insurance and you cause an accident, you could find yourself owing a significant amount of money to the people who suffered physical and/or property damage.

Typically, you need to maintain at least your state’s minimum level of liability insurance before you can legally register and drive your vehicle. However, even if you do have liability coverage, the other parties involved could still sue you personally if the damages caused exceeds the amount of coverage you have.

How Much Does Liability Coverage Cost?

The cost of liability insurance varies depending on a variety of factors, including the state where you live, your insurer, and the plan and coverages you choose. In 2019, the U.S. average for liability insurance was $650.35 per year per vehicle. 

While keeping your liability coverage as low as possible could help you save on your insurance premiums, it’s important to remember that without enough coverage, you may have to pay for additional expenses out of your own pocket. This could put your savings and other assets at risk.

In addition to considering your state’s minimums, think about how much you could afford to cover if you’re involved in an at-fault accident. Also, remember that the more assets you have, the more coverage you may need.

For example, if you cause an accident that results in $150,000 in property damage but your policy only covers $35,000, the other driver could sue you for the remaining $115,000. If they win, you may be responsible for paying even if that means liquidating your assets. With this in mind, it could be a good idea to purchase higher liability coverage through your auto insurance policy. In some cases, you may also find that you need additional protection through a separate umbrella insurance policy, which is a separate policy that extends your liability coverage beyond what your auto insurance company offers.

How to Make Liability Coverage More Affordable

Liability insurance is important, and in some states, it’s required. However, it does come with a cost. The good news is that there are some ways to lower your overall car insurance premiums without reducing your liability coverage.

Improve Your Credit Score

When setting rates, vehicle insurance companies often use a credit-based insurance score. These are calculated, in part, from some of the same factors that impact your credit score. Therefore, taking steps to improve your credit score may help keep your insurance rates down.

One of the most straightforward ways to improve your credit score is to consistently pay your bills on time. If you have past-due accounts, it is advisable to bring them current as quickly as possible. It’s also a good idea to work on paying down your debts since high credit utilization rates can also lower your credit scores.

Take a Defensive Driving Course

Some insurance companies may provide you a discount on your premiums if you voluntarily take an approved defensive driving course. These classes are designed to teach you specific driving strategies that can help keep you and others safe when you’re behind the wheel.

Many states use a points system, which gives demerit points to drivers for offenses such as speeding tickets and other driving infractions. If you accumulate a certain number of points, there’s a chance your driver’s license could be suspended. Sometimes, taking a defensive driving course can reduce points or even remove a minor violation from your driving record. This could, in turn, lower your insurance premiums.

Drive Less

The less you drive, the less likely you are to have collisions that could raise your insurance rates. Some insurance companies also offer low-mileage discounts to motorists who drive less than the average number of miles per year.

Taking steps like carpooling to work, using public transportation, or walking to your destinations more often may help you become eligible. Your auto insurance provider can tell you what the threshold is, so you can decide whether this might be an option for you.

Maintain Active Auto Insurance Coverage

Some insurance companies consider lapses in policy coverage an indication of a potentially high-risk driver. If you’re planning to take a break from driving temporarily, it may make sense to purchase a non-owner car insurance policy rather than canceling your insurance or letting it lapse. This may be something to consider if you’ve primarily switched to using public transportation, you’re going away to college and not taking your vehicle with you, or if another similar circumstance applies.

If you want to make sure you’re properly covered in the event of an accident, it makes sense to carefully review your insurance policy. Ensure you understand the amount of coverage you currently have and consider whether this is sufficient for you. If you’re not sure, consider calling your insurance agent or policy provider to discuss your coverage in greater detail.